UK retail sales disappoint

UK retail sales disappointed again in January, denting hopes for growth in the first quarter of 2013.

Volumes fell 0.6% from December 2012, hurt by heavy snowfall, according to the Office for National Statistics (ONS). Retail sales also dipped 0.3% in the key month of December and fell by 0.1% in November. January marked the fourth successive monthly drop in retail sales.

Volumes also dropped 0.6% from a year ago, the first annual fall in 17 months.

The fall in sales in January was particularly disappointing, as the British Retail Consortium (BRC) had previously indicated that sales saw a decent gain over the month despite the bad weather. The BRC had indicated the negative impact on retail sales from January's snow was too short-lived to have offset a strong start to sales at the beginning of the month.

The BRC had said retail sales were lifted early on in January by shoppers looking to take advantage of the best of the bargains in the clearance sales, while it also reported a number of consumers treated themselves to "full-price and premium products early in January, particularly must-have technology items".

Analyst view

"While much of January's weakness in retail sales can be attributed to footfall being affected for a time by the month's snow, it nevertheless appears that consumers are currently reluctant to spend," stated Howard Archer, chief UK and European economist at IHS Global Insight.

He pointed out that a serious concern for retailers - and the economy in general - was that consumers' purchasing power was coming under renewed pressure from a move back up in inflation while earnings growth remains muted. Consumer price inflation has moved back up to 2.7% from 2.2% in September and seems set to move above 3.0% over the coming months, while annual earnings growth has faltered to stand at just 1.3% in November.

Highlighting the pressure on consumer spending power, data released from the ONS this week showed median real earnings fell from £12.25 per hour in 2009 to £11.21 per hour in 2012. This was similar to the 2003 level.

Archer also reminded investors that many households have faced an extended squeeze on their finances, so are still in a vulnerable position even if they generally saw improvement over the first three quarters of 2012.

"Indeed, there is a need for extended deleveraging by many consumers," he commented. "And while consumer confidence has picked up, it remains very low compared to long-term norms. Meanwhile, tighter fiscal policy is affecting many households."

Samuel Tombs, UK economist at Capital Economics, echoed this view: "2013 still looks set to be another tough year for retailers, given the likelihood of a further significant squeeze on real pay and a weaker jobs market."

Online sales a winner

The ONS highlighted weak sales in the food sector, which dropped 2.6% year-on-year to the lowest level since April 2004.

What the data did point out was that while small stores suffered as they were shut during the bad weather, larger stores saw an increase from a rise in online sales.

John Ibbotson, director of retail consultancy Retail Vision, noted online accounted for more than 10% of all non-fuel retail spending and predicted the figure was likely to reach 25% by 2016.

"Large retailers have learnt to use online as a hedge against bad weather, and the multichannel champions like Tesco (TSCO) and Currys go from strength to strength," he pointed out.

"But snow or no snow, online shopping has an irresistible economic logic. People will always be drawn to the web's consistently lower prices."